Importance of cash and cash flow statement, Cost Accounting

Cash is the other form of fund although in a narrow sense, this refers to a supply which can be drawn upon as per to the need. Here the term cash involves both cash and cash equivalents. Cash equivalents are very liquid short term investments that could be easily transformed into cash without much waiting.

This may still be appreciated that the obligations and liabilities of a business arising on an everyday basis should be met by "Cash" or "Cheque". We should also be capable to distinguish among "Profit" and "Cash". One cannot pay to the creditors, tax, electricity bills, or even dividend through Net Profit". For such or the many other purposes, a business requires either physical cash or balance or credit limits along with banks. Not to be capable to meet the business commitments by cash as and when these occur can spell disaster  for  a  business  even  though  it  has  a  strong  working  capital  and it has  earned attractive profit.

Very far we had noticed that the balance sheet and profit and loss account give information regarding the financial position and the outcomes of operations in a financial period. The funds flow statement explained previously traces the flow of funds by the organization. However, neither of these financial statements can give information regarding the cash flows relating to operating, investing and financing activities.

To make sure that the right quantity of cash is obtainable in accordance with the requirements of a business it is essential to make a "cash planning" by finding the amount of cash entering the business as cash inflow and the cash leaving the business as cash outflow. The statement that explains the changes which take place in cash position among two periods is termed as the cash flow statement.

Cash flow statement is a significant tool in the hands of the management for short-term planning and coordinating of different operations and projecting the cash flows for the future.  This presents an entire view about the movement of cash and identifying the sources from that cash can be acquired when required. The comparison of the actual cash flow statement along with the projected cash flow statement assists in knowing the trends of movement of cash and also the purpose for the success or failure of cash planning.

Fund flow and cash flow statements are as same to each other in many respects. The major difference that is, lies in the fact as the terms "fund" and "cash" import diverse meaning. The term "fund" in fund flow statement has a broad meaning. A fund flow statement studies the impact of changes in fund's position throughout the period in review on the working capital of the concern as working capital considered as to current assets current liabilities. Cash in the cash flow statement considered as only to cash and or balance with bank that is a small part of the total fund, though very significant. The cash flow statement starts along with the opening cash balance, demonstrates the sources from where additional cash was received and also the uses to which cash was put and ends up showing the closing balance as at the ending of the year or period in review. There are no closing and opening balances, in the Funds Flow statement. Increase in current assets or decrease in current liabilities increases the working capital, whereas the decrease in current assets or raise in current liabilities raises the cash flow.

Posted Date: 4/9/2013 1:52:22 AM | Location : United States







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